Institutions and Polarization: The Dynamics of Income Inequality in the Brazilian Labor Market from 1981 to 2011

Abstract

Over the last years, there was a continuous fall in labor income inequality in Brazil, as measured by household survey inquiries. The major explanatory factors pointed by economists were related to the composition of the workforce (in terms of skills and productive potential) and the technological changes. Institutional and relational factors were neglected. In this work, we argue that there are interpretive and empirical gains when we take into account sociological factors such as the occupational structure and the labor market institutions. We apply some decomposition methods and build counterfactuals to test this hypothesis and contrast it to the institutional approach, based on the occupational structure and the state regulation of work contracts. We analyze these dynamics in Brazil, from 1981 to 2011. We found a skill-biased polarization related to the educational composition effect. However, the average income gap between the educational groups have dropped (decline of returns). We also observed that there was a great reduction in internal variance of these educational groups. As a result, the net effect of education is a decrease in inequality; despite the existence of a component of polarization. There was also a great approximation of the incomes of the formal and informal sectors -- and they both have become internally more homogeneous. Our study found that the polarization pattern was offset by other factors. This raises a question about the strength of this process guided by the demand for skill and about the necessary conditions for its occurrence.